Liu Qing, president of Didi, said China Merchants Bank would provide automobile financing to the car-hailing app’s drivers for them to buy new cars by instalment. The loan terms and payment plans will be based on a joint review by both companies.

The two firms would continue to seek close ties in automobile credit and other financial services, Liu said.

Of the 14 million registered Didi Kuaidi drivers, six million were active and some had indicated their need to replace old cars or buy a new one, Liu said.

“From China Merchants Banks’ perspective, they love this business but they worry about risk control and steady revenue income,” she said.

“We have the capability to grow the user base and driver base even without financing plans, but for this year, our focus is to continue to add value to users and drivers. Using smart financing plans to get a car or replace the old one will be beneficial,” Liu said.

From 2006 to 2014, Ben Bernanke served as the chairman of the US Federal Reserve, a period marked by the worst financial crisis since the Great Depression. His new book, The Courage to Act: A Memoir of a Crisis and its Aftermath, tells the story of the efforts by officials to halt the panic in 2008 and rescue the US economy.

Q: Looking back, how close did the US come to experiencing another Great Depression?

A: I think the risk was quite high, based on historical experience and on the reaction of the economy to the intensification of the panic in the fall of 2008. We saw a tremendous contraction in jobs and GDP growth in the fourth quarter of 2008 and the first quarter of 2009, before the crisis was stabilized.

Q: At the time, did you think another Depression was looming?

A: I certainly thought it was a realistic possibility, and I don’t know how much of a probability of Depression you want before you work really hard to avoid it. I did think the collapse of the financial system would have serious effects on the economy, and what we saw in the fall of ’08 and the spring of ’09 confirmed how powerful those effects were.

Q: What was the darkest moment for you?

A: The worst moment was probably the famous Lehman weekend [Sept. 13 to 15, 2008], when I learned that, despite all our best efforts, we had no way to save Lehman. The concern was not about the company itself, but rather that its failure would greatly worsen the panic that was under way.

Q: In your book, you describe it as a “terrible, almost surreal moment,” and that America was staring “into the abyss.” What made that worse than other moments in the crisis?

A: It was the only case where we weren’t able to come up with some solution. Bear Stearns was acquired by JP Morgan with Fed help [on March 16, 2008]. We averted the kind of panic at that stage that we would get later in September ’08. And then, subsequently, we had very tough moments in September with AIG. But Lehman was the only big financial firm to collapse.

Q: That was 2008. The US has had interest rates at near zero for seven years. Monetary stimulus has added trillions to the Fed’s balance sheet. So why is the economy still so weak?

A: Well, the Fed can do two things: It can help the economy recover from recession, and it can keep inflation low and stable. Inflation is certainly low and stable–in fact, below the two per cent target–and, measured in unemployment and labour-market slack, the economy has made a lot of progress. The pace of growth is disappointingly slow, mostly because productivity growth has been very slow, which is not really something amenable to monetary policy. It comes from changes in technology, changes in worker skills and a variety of other things, but not monetary policy, in particular. You say the economy is so weak. It’s certainly not where we would like it to be, but if you compare it to Europe or Japan, other industrial economies, they have done much worse.

Q: Looking back, what would you have done differently in your response to the crisis?

A: If anything, it could have been even a bit more aggressive. I think the one point you could also make is that the Federal Reserve has been bearing most of the burden, and there are limits to what monetary policy can do. We would have been better off with a more balanced policy approach involving both monetary and fiscal policy.

Q: You wrote that you came to feel that the $787-billion stimulus plan [in 2008] was too small.

A: It was not only the initial stimulus, which was actually helpful, but, after 2010, fiscal policy got fairly contractionary, with almost no job growth in the public sector. Also, the fiscal policy-makers have actually been doing damage to the recovery, with things like coming close to not raising the debt ceiling.

Q: How much of a role should fiscal policy play at a time like this, when we’ve seen monetary policy so ineffective?

A: It depends on the fiscal condition of the country. If you’re Greece, there’s not a lot of scope for using fiscal policy to help you grow, because you don’t have the fiscal space. But the United States could have been less restrictive on fiscal policy from 2010 to 2014. So if a country has scope to use fiscal policy, I think there’s an argument for having a better balance between monetary and fiscal policy.

Q: What about Canada?

A: I’m not just being coy; I don’t think I know enough about it to say anything smart.

Q: Let’s go back to before the crisis. You’ve taken heat for dismissing the housing bubble. How much of that was you not seeing the bubble, versus you not wanting to panic people by talking about it as such?

A: We certainly knew house prices were very high, and understood there was a good chance they would have to come back down. We also understood that subprime mortgages–I’m talking now about after I became chairman in 2006–were failing at increasing numbers. But what we missed was really the possibility that the losses in subprime mortgages would create a financial panic that would almost bring down the financial system. If it hadn’t been for the panic, I don’t think the implications for the broader economy would have been nearly so large.

Q: In the book, you argue that the panic itself caused more damage to the economy than the actual trigger, the housing bubble. But how can you separate the two, because the panic was a response to nobody knowing the value of those toxic assets created in the bubble?

A: That’s right, but financial panics typically start with some kind of trigger, which creates uncertainty. If the financial system is vulnerable or weak enough, it can spread into a forest fire of a panic. The fear of subprime losses led investors to stay away from any kind of credit product, even things like credit cards and automobile credit that actually did fine. So it was the panic throughout the system that was the really costly part of the collapse. Of course, the housing collapse was important, too, but the collapse in jobs didn’t happen until after Lehman, and then it was intense. Meanwhile, house prices actually weren’t falling very quickly, but after Lehman, and after the crisis intensified, that’s when house prices really began to fall sharply. So it was the intensification of the panic in September of ’08 that really led to the very sharp decline in the US economy.

Q: What damage did the bank bailouts do to Americans’ trust in the financial system?

A: There was certainly some negative political reaction, which I fully understand. People were very unhappy with the fact that the economy was doing so poorly, and they were having difficulty finding work or paying the bills. They were very resentful that it looked like the Wall Street firms were getting help, but they weren’t. So I’m totally sympathetic to that, and I understand the anger. I’m hopeful that as the economy gets better, and the rules that were put in place make the financial system safer, people will appreciate that what was done was necessary for the stability of the overall economy.

Q: In a recent interview, you said somebody should have gone to jail for causing the crisis. Why haven’t they?

A: What the Department of Justice [DOJ] did was essentially not prosecute or pursue individuals–not necessarily executives, but traders or anybody. Instead, they prosecuted or extracted fines from large financial institutions. If laws were broken, or if bad practices were promulgated, they were done by some individual. So the DOJ should have pursued the individuals.

Q: Yet the DOJ argued it would create financial uncertainty and hurt the economy.

A: That’s quite the contrary. Exacting big fines on big banks cuts into their capital and makes them a little bit less stable, whereas going after individuals shouldn’t have any adverse effect on the institutions themselves.

Q: The Bank of Canada has cut rates twice this year, as have other countries, making it harder for US exporters to compete. What challenge is this posing for the Fed?

A: Of course, weaker currencies abroad mean a strong dollar, and a stronger dollar, together with a weak global environment, is a drag on the US economy. So it’s important, as it affects overall levels of production and employment in the US It’s not the only factor. There are many domestic industries doing well in the United States, notwithstanding a strong dollar. But the Fed will have to pay attention to what’s happening outside the country and with the dollar, because exports are one of the sources of demand for US goods and services. So, to the extent that that’s slowing the US economy, that’s something that the Fed has to take into account.

Q: Is there a risk of currency wars?

A: No, I don’t think so. To the extent that a country changes its monetary policy and weakens its currency, that is going to take exports away from other countries, it’s true, but the easier monetary policy strengthens the domestic economy of that country. That’s actually an offset. It provides more demand for foreign goods and services. So the view held by the G7 and other international groups is that changes in currencies created by monetary policy are not a form of currency war.

Q: But isn’t there a risk of a race to the bottom as central banks cut to counter each other?

A: Again, they’re not working against each other. If two countries both ease monetary policy, their relative currencies shouldn’t change very much, because they’re both eased. But you get more demand in both, so you should get a win-win situation there.

Q: The US is already at zero, though; it can’t cut anymore.

A: It’s only a problem to the extent that it prevents the overall US economy from recovering. If the Fed determined, hypothetically, that because of the strong dollar, the US economy couldn’t recover, it could postpone any rate increases. That would amount to a form of easing.

Q: As a student of history, you know how the understanding of a crisis can change over ensuing decades. What do you hope your legacy will be when people look back at your time at the Fed?

A: I think we used the lessons of classic financial panics to understand and respond to this panic, and we demonstrated the importance of both a strong financial system and an effective response to a financial crisis. We did succeed in stopping the crisis and in helping the economy return to where we’re currently, about five per cent of employment, so that’s what we accomplished. We also increased the transparency of the Fed, for example, introducing things like press conferences and other kinds of public communication. And of course we demonstrated that even when interest rates get close to zero, there’s still more the Fed can do–we used quantitative easing and forward guidance to provide more stimulus and helped the economy recover.

The Consumer Financial Protection Bureau and Department of Justice recently entered into a Consent Order with an automobile finance company for alleged violations of the federal Equal Credit Opportunity Act, 15 USC. sect;sect; 1691 (ECOA), arising from the auto finance companys policies and practices allowing car dealer discretion for interest rate markups.

A copy of the consent order is available at:Link to Consent Order.

A copy of the related DOJ complaint is available at:Link to Complaint.

In connection with sales of cars on credit, car dealers frequently submit credit applications to auto finance companies on behalf of their customers. The auto finance company sets minimal interest buy rates for approved sales contracts that it will buy from car dealers, and informs the dealers of these buy rates. Auto finance companies often provide car dealers with discretion to mark up a consumers interest rate above the buy rates for certain types of transactions, and the finance company compensates the car dealer for the expected increased interest revenue to be derived from the dealer markups.

The CFPB and DOJ alleged that the finance company caused race and national origin discrimination in violation of the ECOA and its implementing regulation, Regulation B, 12 CFR. Part 1002, by allowing car dealers to include interest rate markups not based on the borrowers creditworthiness or other objective criteria related to the borrower risk.

The CFPB and DOJ further claimed the auto financers policy and practice of allowing this discretion, and by compensating dealers for the dealer markups without adequate controls and monitoring, was not justified by legitimate business needs that could not be reasonably achieved by means that were less disparate in their impact on protected groups.

The Consent Order noted the DOJ and the CFPB used a Bayesian Improved Surname Geocoding (BISG) method based on geographical and name census data to show alleged interest rate disparities of 36 basis points higher than similarly situated white car buyers for African-American car buyers, 28 basis points for Hispanic car buyers, and 25 basis points for Asian and/or Pacific Islander car buyers.

The Consent Order further asserts that the auto finance company did not monitor whether prohibited discrimination occurred for dealer markups, and did not employ adequate controls to prevent discrimination.

In addition, the Consent Order asserts that the policy and practice of allowing dealer markups without adequate controls and monitoring was not justified by legitimate business needs, and resulted in illegal discrimination on the basis of race and national origin.

Among other things, the Consent Order requires that the auto finance company:

not engage in race or national origin discrimination in any aspect of dealer discretion in automobile credit sales pricing;

implement a dealer compensation policy conforming with one of three described options to ensure compliance with the ECOA;

make submissions for review by a compliance committee;

deposit $24 million for redress to affected consumers and create a plan for remuneration; and

retain business records for five years demonstrating compliance.

The Consent Order further released and discharged the auto finance company from all potential liability in the consent order, and the auto finance company was not assessed any monetary penalties.

(The following statement was released by the rating agency)
JAKARTA/TAIPEI/SINGAPORE, March 19 (Fitch) Fitch Ratings has
assigned
Indonesia-based PT Astra Sedaya Finance (ASF) a Long-Term Issuer
Default Rating
(IDR) of BBB- and Short-Term IDR of F3. The agency has
affirmed the
companys National Long-Term and Short-Term Ratings at AAA(idn)
and F1+(idn)
respectively . The outlook is Stable. At the same time, Fitch
Ratings has
assigned ASFs proposed USD1bn euro medium-term note (EMTN)
programme a senior
unsecured rating of BBB-(EXP), and its proposed notes of up to
USD250m under
the EMTN programme a rating of BBB-(EXP). The final rating on
the proposed
notes is contingent on the receipt of final documents conforming
to information
already received. A full rating breakdown is provided at the end
of this
commentary.
Fitch stresses there is no assurance that notes issued in the
future under the
programme will be assigned a rating, or that the rating assigned
to a specific
issue under the programme will have the same rating as the
programme. The
proceeds from the proposed issue will be used to support ASFs
business growth.
KEY RATING DRIVERS – IDRs
ASFs ratings reflect Fitchs expectation of a high probability
of support from
its majority shareholder, PT Astra International Tbk (AI). Fitch
considers ASF
as a strategically important subsidiary of AI, as ASF accounts
for a sizable
portion (around 30% in 2014) of the parents automobile credit
sales. The
support also reflects AIs significant 86% effective ownership
as well as ASFs
strong synergies and integration with the parent. AI is the
largest automobile
manufacturer and distributor with a dominant 51% share of the
market in
Indonesia by new car sales.
ASF provides direct financing services for buyers who purchase
AIs cars,
playing an important role in supporting AIs sales. AI is
Indonesias largest
private company by market capitalisation; it is a market leader
in the
automotive, financial services, agribusiness, heavy equipment
and information
technology sectors. It is 50.1% owned by Jardine cycle
Carriage Ltd, part of
Jardine Matheson Group.
Fitch expects ASF to continue delivering healthy profitability
in 2015 in spite
of a challenging economic environment, underpinned by its
manageable credit and
funding costs. Sound underwriting policy and risk management
should continue to
sustain its healthy asset quality. ASF has built up a high
reserve against
non-performing loans enabling it to absorb credit losses through
economic
cycles.
RATING SENSITIVITIES – IDRs, National Ratings
Any significant decline in AIs ownership and/or ASF
contribution to AI would
exert downward pressure on its IDRs and National ratings.
However, Fitch
believes this scenario is unlikely in the foreseeable future,
given ASFs
strategic importance to AIs core carautomotive business. ASFs
ratings are also
sensitive to Fitchs assessment of AIs credit profile; any
change of the AIs
assessment will most likely lead to a review of ASFs IDRs.
KEY RATING DRIVERS AND SENSITIVITIES – Debt Ratings
ASFs proposed euro medium-term notes are rated as the same
level as its IDR in
accordance with Fitch criteria. Any changes in ASFs IDR would
affect the issue
ratings.
The list of rating actions is as follows:
Long-Term Issuer Default Rating (IDR) assigned BBB-; Stable
Outlook
Short-Term Issuer Default Rating (IDR) assigned F3
National Long-Term Rating affirmed at AAA(idn); Stable Outlook
National Short-Term Rating affirmed at F1+(idn)
USD1bn Senior EMTN programme and senior tranches under the
programme assigned
BBB-(EXP)
National Senior Bond Programme II 2013 and senior tranches under
the programme
affirmed at AAA(idn) and F1+(idn)
Contacts:
Primary Analysts (International Ratings)
Ambreesh Srivastava
Senior Director
+65 67967218
Fitch Ratings Singapore Pte Ltd
6 Temasek Boulevard
#35-5 Suntec Tower Four
Singapore 038986
Julita Wikana (National Ratings)
Director
+62 21 2988 6808
PT Fitch Ratings Indonesia
DBS Bank Tower Level 24
Jl. Prof. Dr. Satrio Kav.3-5
Jakarta, Indonesia 12910
Secondary Analyst
Julita Wikana (International Ratings)
Director
+62 21 2988 6808
Committee Chairperson
Jonathan Lee
Senior Director
+886 2 8175 7601
Applicable criteria, Global Financial Institutions Rating
Criteria, dated 31
January 2014, Finance and Leasing Companies Ratings Criteria,
dated 12
December 2012, Rating FI Subsidiaries and Holding Companies,
dated 10 August
2012, and National Scale Ratings Criteria, dated 30 October
2013, are
available at www.fitchratings.com.
Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234,
Email:
leslie.tan@fitchratings.com.
Additional information is available at www.fitchratings.com.
Applicable Criteria and Related Research:
Global Financial Institutions Rating Criteria
here
Finance and Leasing Companies Criteria
here
Rating FI Subsidiaries and Holding Companies
here
National Scale Ratings Criteria
here
Additional Disclosure
Solicitation Status
here
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND
DISCLAIMERS.
PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS
LINK:
here. IN ADDITION,
RATING
DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE
ON THE AGENCYS
PUBLIC WEBSITE WWW.FITCHRATINGS.COM. PUBLISHED RATINGS,
CRITERIA AND
METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCHS
CODE OF
CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE
FIREWALL, COMPLIANCE
AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE
FROM THE CODE OF
CONDUCT SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER
PERMISSIBLE
SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES.
DETAILS OF THIS
SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN
EU-REGISTERED
ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER
ON THE FITCH
WEBSITE.

Non-performing loans (NPLs) are not expected to worsen in the first quarter given improved economic growth prospects, but consumer loans could rise moderately, says a senior Bank of Thailand official.

We have to concede that consumers need some time for their income to increase and make repayments [for their debt obligations], therefore there could be a rise in [NPLs of] consumer loans, said Jaturong Jantarangs, a senior director of the financial institutions strategy department.

But the pressure could be slightly eased by the declining trend in overall business NPLs, and the default rate in that segment is not high, while utility loans are expected to help drive better loan growth, he said.

Overall business NPLs shrank slightly to 193.7 billion baht in 2014 from 194 billion baht a year earlier.

Outstanding NPLs in 2014 stood at 277 billion baht, up by 11.5 billion baht from a year earlier, but gross NPLs remained at 2.15%, the same figure in 2013, while net NPLs rose slightly to 1.08% from 1% in 2013.

Consumer NPLs rose to 2.39% last year, up from 2.2% in 2013, on the back of an increase in bad loans for the automobile, credit card and personal loan segments.

Automobile NPLs rose to 2.5% from 2%, while NPLs in the credit card and personal loan segments increased by 3.2% and 2.5% from 2.6% and 2.3%, respectively.

Mr Jaturong said an accumulation of household debt prior to last years economic slowdown caused consumer income to decline and it is considered as an additional factor adding to the rise in last years consumer NPLs.

Outstanding special mention loans increased to 336.4 billion baht last year, up from 295.6 billion baht recorded in 2013, due mainly to loans provided to the manufacturing sector, rising to 5% from 4%.

The ratio of special mention loans to total loans increased by 2.6% in 2014, up from 2.4% in 2013.

Special mention loans are defined as 30 to 90 days overdue.

Last years total loan growth was registered at 5%, down from 11% recorded in 2013, due to the impact of the political turmoil in the first half, contracted export growth and swelling household debt.

Although the expansion of loan growth on an annual basis in last years fourth quarter dropped, quarter-on-quarter loan growth accelerated with the highest growth rateof2.9% in the fourth quarter, said Mr Jaturong.

While the federal budget deficit has decreased in the past few years, this decline follows an unprecedented increase in the deficit in prior years and remains high by historical standards. Today, public debt is more than 72 percent of our economy and is expected to rise, even with the economy poised to recover from the recent downturn. The Congressional Budget Office projects public debt will reach 78 percent of the economy by 2024. That is twice the historical average of 39 percent of the economy over the past 40 years.

Just 10 years from today, three-fourths of all federal spending will go to mandatory programs and interest on the debt. Higher federal debt translates into higher interest rates down the road and less capital available for small and mid-size businesses to borrow and invest. Families will then feel the effects of the rising debt as reduced investment can mean fewer jobs and lower wages, while higher interest rates will make home, automobile, credit cards and even college loans more expensive.

President Rutherford B. Hayes once stated, “Let every man, every corporation and especially let every village, town and city, every county and State, get out of debt and keep out of debt. It is the debtor that is ruined by hard times.”

Under current laws and operating practices, public debt will exceed the size of the economy by the late 2030s. If Congress continues to act irresponsibly and kick the can down the road, debt will reach even higher. As recently as 2007, debt was only 35 percent of the economy. The post-World War II average is about 40 percent. The growth in projected debt is due chiefly to the aging population and growing healthcare costs, resulting in increased Social Security and federal health spending. By 2045, 100 percent of federal revenue will go toward our major entitlement programs and interest on the debt.

There will be opportunities this year to reach agreements on deals that improve our fiscal situation. Those need to be approached with strong bipartisan support and a clear understanding of the importance of getting our fiscal house in order. We cannot and should not accept anything less than Congress making reduction of national debt a top priority. Additionally, President Obama needs to devote part of his final years as POTUS to reducing the burden of debt on this and future generations.

The Campaign to Fix the Debt is a non-partisan movement to put America on a better fiscal and economic path. More information about the movement can be found at www.fixthedebt.org.

President George Washington once cautioned about the importance of “avoiding likewise the accumulation of debt, not only by shunning occasions of expense, but by vigorous exertions in time of peace to discharge the debts which unavoidable wars have occasioned, not ungenerously throwing upon posterity the burden which we ourselves ought to bear.”

We need to be active in raising the issue, holding our elected officials accountable for failure to take action, and ensuring our candidates for office not only understand the importance of this debilitating issue but are willing to do something novel by going to work on solving our national debt.

Jeff Wasden is president of the Colorado Business Roundtable.
He can be reached at jwasden@cobrt.com.

The total personal loan debt in Turkey reached TL 343 billion as of May 2014, according to recent figures from the Banking Regulation and Supervision Agency (BDDK).

In 2008, consumer debt amounted to TL 55.3 billion, a number which more than tripled to TL 182 billion by the end of 2013. As of May 2014, gross personal loans, including mortgage, automobile, credit card and other loans, had reached the TL 343 billion mark. Of that, mortgage loans came to TL 114 billion, automobile loans totaled TL 7.8 billion, credit card debt represented another TL 77.5 billion, and “other” loans amounted to TL 142.3 billion.

The number of consumers unable to pay their personal loans or credit card debt doubled from 429,000 people in 2009 to 913,000 in 2013. As of May 2014, an additional 532,000 were in danger of defaulting on loan or credit card payments.

According to a recent report from the Turkish Banks Association (TBB), the use of personal loans has shifted from Turkeys largest city of Istanbul and the capital city of Ankara toward Anatolia. The report indicates that the share of personal loans increased in 76 of Turkeys provinces by an average of 2.35 percent since 2002, while decreasing in Istanbul and Ankara, by 10.4 percent and 6.3 percent, respectively.

Recent statistics from the Central Bank of Turkey from the first week of July indicated that consumer credit and credit card usage continue to rise. Installment-based commercial loans increased 30.31 percent on a year-to-year basis while consumer loans rose by 15.99 percent.

TBB figures also indicate that the number of people holding consumer loans nearly doubled from 5.8 million in 2008 to 11.1 million in 2013.

A written statement from opposition Republican Peoples Party (CHP) Deputy Umut Oran from last week said that both public and foreign debt have also risen drastically since the early 2000s, when the ruling Justice and Development Party (AK Party) came to power.

Since 2002, total public debt more than doubled from TL 257 billion to TL 636 billion as of May 2014. Total foreign debt in the public and private sectors tripled, increasing from $129.6 billion in 2002 to $386.8 billion. In the same period, the price of bread doubled while the price of gasoline tripled and minimum wage earners sustained heavy losses in purchasing power. Personal loan debt is 127 times greater and credit card debt increased nearly twentyfold.

News reports from earlier this year indicated that the majority of those with housing and consumer loans come from lower-income groups. More than half of those taking out housing and consumer loans — a total of 10 million people — fall into the lower-income bracket, earning TL 2,000 or less monthly. Only 7 percent of those earning more than TL 5,000 a month took out housing and consumer loans while 14 percent of those with these types of loans earned between TL 2,000-3,000 per month.

Figures from the Turkish Statistics Institute (TurkStat) released last month indicated that just under 9 percent of those who committed suicide in 2013 did so due to economic difficulties or business failure. Some 200 people have reportedly committed suicide in Turkey due to credit card debt in the past decade.

Wells Fargo amp; Company (NYSE:WFC) reported net income of $5.7 billion, or
$1.01 per diluted common share, for second quarter 2014, up from $5.5
billion, or $0.98 per share, for second quarter 2013. For the first six
months of 2014, net income was $11.6 billion, or $2.06 per share, up
from $10.7 billion, or $1.90 per share, for the same period in 2013.

“Our strong results in the second quarter reflected the benefit of our
diversified business model and our long-term focus on meeting the
financial needs of our customers,” said Chairman and CEO John Stumpf.
“By continuing to serve customers we grew loans, increased deposits and
deepened our relationships. Our results also reflected strong credit
quality driven by an improved economy, especially the housing market,
and our continued risk discipline. We are committed to both maintaining
strong capital levels and returning more capital to our shareholders. In
the second quarter we increased our common stock dividend 17 percent and
repurchased 39.4 million shares. We remain dedicated to building
long-term shareholder value, and I am optimistic about the future as we
continue to focus on meeting the needs of our consumer, small business
and commercial customers.”

Chief Financial Officer John Shrewsberry said, “The primary drivers of
Wells Fargo’s business remained strong in the second quarter, with
broad-based loan growth, increased deposit balances, and improved credit
quality. Revenue increased linked quarter as the Company grew both net
interest income and noninterest income, a reflection of Wells Fargo’s
diversified business model. These solid fundamental business results led
to an increase in pre-tax income linked quarter. Net income was down as
the Company’s effective tax rate was lower in the first quarter due to a
$423 million discrete tax benefit.”

Net interest income in second quarter 2014 increased $176 million on a
linked-quarter basis to $10.8 billion driven by organic growth in
commercial and consumer loans and higher mortgages held for sale and
trading assets. Approximately one-third of the increase resulted from
the benefit of one additional business day in the quarter. Interest
income from variable sources, including purchased credit-impaired (PCI)
loan resolutions and periodic dividends, also improved slightly linked
quarter.

Net interest margin was 3.15 percent, down 5 basis points from first
quarter 2014 as strong customer driven deposit growth contributed to
higher cash and short-term investment balances. This deposit growth was
essentially neutral to net interest income, but had the effect of
diluting net interest margin approximately 5 basis points. Liquidity
funding actions taken to meet regulatory expectations also diluted the
margin by 1 basis point, but with minimal impact to net income. Higher
interest income from variable sources contributed 1 basis point to the
change in net interest margin linked quarter. The net impact of all
other balance sheet growth and repricing was essentially flat from first
quarter.

Noninterest Income

Noninterest income in the second quarter was $10.3 billion, up from
$10.0 billion in the prior quarter. Growth was broad-based and was
driven by increases in mortgage banking, trust and investment fees,
deposit service charges, and card fees. These increases were partially
offset by a decline in market sensitive revenue5, mainly
equity gains.

Trust and investment fees were $3.6 billion, up $197 million from first
quarter on higher investment banking and brokerage advisory, commissions
and other fees. Investment banking fees increased $164 million linked
quarter on broad-based growth. Brokerage advisory, commissions and other
fees were up $39 million from the prior quarter as asset-based fees
increased due to higher market valuations and net customer flows.

Mortgage banking noninterest income was $1.7 billion, up $213 million
from first quarter. During the second quarter, residential mortgage
originations were $47 billion, up $11 billion linked quarter, while the
gain on sale margin was 1.41 percent, compared with 1.61 percent in
first quarter. Net mortgage servicing rights (MSRs) results were
$475 million, compared with $407 million in first quarter 2014.

Noninterest expense increased $246 million from the prior quarter to
$12.2 billion, as a decline in seasonally-elevated compensation and
benefits costs from first quarter 2014 was offset by higher
revenue-based incentive compensation, increased salary expense due to
annual merit increases and the impact of one additional day in the
quarter, an $84 million linked-quarter increase in deferred compensation
benefit costs (offset in revenue) and a $205 million linked-quarter
increase in operating losses largely due to litigation accruals.
Expenses in the quarter also included higher outside professional
services and advertising expenses, which are typically lower in the
first quarter. The efficiency ratio was 57.9 percent in second quarter
2014, in line with first quarter 2014. The Company expects to operate
within its targeted efficiency ratio range of 55 to 59 percent in third
quarter 2014.

Income Taxes

The Company’s effective income tax rate was 33.4 percent for second
quarter 2014, compared with 27.9 percent in the prior quarter. The tax
rate for the first quarter included a net $423 million discrete tax
benefit primarily from a reduction in the reserve for uncertain tax
positions due to the resolution of prior period matters.

Loans

Total loans were $828.9 billion at June 30, 2014, up $2.5 billion from
March 31, 2014, driven by broad-based growth in commercial and
industrial, automobile, credit card, 1-4 family first mortgage and
commercial real estate loans. This growth was reduced by the transfer to
loans held for sale at the end of the quarter of $9.7 billion of
government guaranteed student loans, which were previously included in
the Company’s non-strategic/liquidating loan portfolio. Excluding this
transfer, total loans would have been up $12.2 billion, or 6 percent
(annualized), from first quarter. Core loan growth was $15.1 billion, as
non-strategic/liquidating portfolios declined $12.7 billion in the
quarter, including the $9.7 billion transfer. Average total loans were
$831.0 billion, up $7.3 billion from the prior quarter, mainly
reflecting growth in commercial and industrial, automobile and
commercial real estate.

The loss of prestige of the liberal arts is part of the general crisis of higher education in the United States. The crisis begins in economics. Larger numbers of Americans start college, but roughly a third never finish–more women finish, interestingly, than do men. With the economic slump of recent years, benefactions to colleges are down, as are federal and state grants, thus forcing tuition costs up, in public as well as in private institutions. Inflation is greater in the realm of higher education than in any other public sphere. Complaints about the high cost of education at private colleges–fees of $50,000 and $55,000 a year are commonly mentioned–are heard everywhere. A great number of students leave college with enormous student-loan debt, which is higher than either national credit card or automobile credit debt. Because of the expense of traditional liberal arts colleges, greater numbers of the young go to one or another form of commuter college, usually for vocational training.

Although it is common knowledge that a person with a college degree will earn a great deal more than a person without one–roughly a million dollars more over a lifetime is the frequently cited figure–today, students with college degrees are finding it tough to get decent jobs. People are beginning to wonder if college, at its currently extravagant price, is worth it. Is higher education, like tech stocks and real estate, the next big bubble to burst?A great deal of evidence for the crisis in American higher education is set out in College: What It Was, Is, and Should Be. Its author, Andrew Delbanco, the biographer of Herman Melville, is a staunch defender of liberal arts, as he himself studied them as an undergraduate at Harvard and as he teaches them currently at Columbia. The continuing diminution of the liberal arts worries him. Some 18 million people in the United States are now enrolled in one or another kind of undergraduate institution of higher learning–but fewer than 100,000 are enrolled in liberal arts colleges.

At the same time, for that small number of elite liberal arts colleges–Harvard, Yale, Princeton, Stanford, Duke, the University of Chicago, and a few others–applications continue to rise, despite higher and higher tuition fees. The ardor to get into these schools–for economic, social, and snobbish reasons–has brought about an examination culture, at least among the children of the well-to-do, who from preschool on are relentlessly trained to take the examinations that will get them into the better grade schools, high schools, colleges, and, finally, professional schools. Professor Delbanco is opposed to the economic unfairness behind these arrangements, believing, rightly, that as a result, “the obstacles [to getting into the elite colleges] that bright low-income students face today are more insidious than the frank exclusionary practices that once prevailed.”